There’s no dearth of lucubration on the World Wide Web on the reasons for the Great Collapse of 2007, and possible solutions for turning around bruised economies, which are still licking their wounds.
According to the literature, one of the patterns that major economies notices as they emerged from the abysmal depths of the recession was that the services sector not only turned the corner faster than the manufacturing sector, but also helped mop up languishing overall (sustainable?) growth figures.
This was particularly true of the UK, but the reason for this could be that the services industry contributes a whopping three quarters of UK’s GDP. That said, is it possible that the UK was vulnerable to the recession in the first place precisely because it was largely dependent on the services sector (which should no more be bracketed as the “tertiary sector”, but is best relegated to a tertiary role)? May be...
The obvious underlying suggestion is that the structure of economies and their reliance on a particular sector largely decide their resilience in the face of recession. But what is to be rigorously analysed is a country’s approach to innovation policy before and after recession, because that would tell us if the country has learnt anything at all from its darkest 'peacetime' hours.
One of the oft-discussed issues in America’s public debate today is the country’s departure from its industrial/manufacturing roots, which is seen as a major unnoticed and neglected cause for the vulnerability of the US economy, besides of course chronic and systemic fiscal myopia.
For a nation whose industrial might was single-handedly responsible for turning it into a fearsome war machine and the sole hyper-military power when it was provoked into jumping into the yawning fire of the Second World War, it is sad that its manufacturing sector is staring down the barrel today.
As is wont, the situation today has a macroscopic perspective and a microscopic one. As far as the macroscopic view is concerned, the services sector is a tempting seductress which promises returns in a geometric progression within a narrow time window and is not as infrastructure-intensive as the manufacturing sector. This makes it an easier and “softer” option for economies which do not have the political will to invest in hard infrastructure (Indian economy being a case in point).
The microscopic view, which is corollarial to the macroscopic one, is that investment in hard infrastructure requires a highly-skilled and reliable industrial workforce, which is willing to constantly learn and adapt to newer technologies and style of functioning (this calls for industry-friendly labour laws as well). This means, besides private enterprise, the government too needs to play a huge role in creating, training and nurturing a workforce, and in chalking out a comprehensive pan-nation industrial innovation policy.
Importantly, the latter again calls for establishment of well-networked innovative institutions which have collaboration-friendly structures to combine their research firepower in good times and in times of dire need to pull out the country’s economy from doldrums. One of the countries which has such an approach at the heart of its innovation policy-making is Germany. Not-so-incidentally, Germany happens to be those rare developed economies which did not buckle under the recession to the extent that US and UK have.
How has Germany’s industrial/innovation policy helped it cocoon itself to a significant extent from the harsh effects of the recession? There is an extremely informative and insightful paper covering the theme of this post and this specific issue. The paper entitled “Can the Relative Strength of the National Systems of Innovation Mitigate the Severity of the Global Recession on National Economies? – The Case of Selected Developed Economies” was presented by A.Baskaran and M.Muchie this April at the DIME Final Conference at Maastricht, Germany.
On Page 11, the authors of the paper enumerate what they perceive to be the strengths and weaknesses of the German system of innovation vis-a-vis its ability to mitigate the effects of recession. Some of the strengths listed therein are relevant to the post, which are as follows:
(i) In contrast to ‘Anglo-Saxon model’ of growth based on financial services (e.g. the UK) and property market, the German economy is strongly rooted in manufacturing, companies invest in long-term growth, and workers-managers relationship is based more on close cooperation;
(ii) Structural reforms in the labour market and corporate sector before the recession helped the German economy to become more competitive;
(xiii) Germany has developed FDI strategies around incentives and clusters and developed world renowned centres of excellence and developed globally recognized position as leaders in certain growth sectors such as clean technology. Germany has also developed well recognized excellence in innovation, and has created the best environment for R&D, which continues to attract companies from abroad to work close to the leading German companies and to access the best talents in the country
The above paper apart, what is even more educational is the recommendation of the Commission of Experts (EFI) (a commission established by the German government) to the German government in its 2009 Report. Under the head aptly titled “Education, research and innovation- a particular priority in recession”, the Commission recommends thus in no uncertain terms:
“The Expert Commission suggests that in the course of implementing the second recovery package, more attention should be paid to the concerns of education, research and innovation. If this is not done, there will be a severe shortfall in the funds available in future to improve the competitive position of Germany. Currently, the German innovation system is still competitive in an international comparison. However, competition is becoming considerably more intense as other industrialised countries and some key emerging economies redouble their efforts. Germany‘s position with respect to R&I will therefore come under pressure if the level of expenditure for research and innovation is only maintained at present levels. There is an urgent need to expand education, research and innovation.”
Most of us would think that financing education, research and innovation when there is a huge liquidity crunch is not just a tall order, but may not be sound policy as well. But not Germany; the recommendation is made bearing in mind the need for skilled manpower after the dust of the recession settles. The report goes on to chart the manner in which innovation must be financed during recession to retain Germany’s competitive edge in the manufacturing sector (I will discuss the report in detail in another post).
These sentiments reveal the psyche that drives the German economy and keeps its hearths burning, when elsewhere there is a beeline outside the employment exchange. What is encouraging to note is that Germany’s vision has certainly yielded positive results for all to see. Here are a few excerpts from articles in The New York Times (US) and The Guardian (UK):
“Germany’s booming growth, and the parallel recovery in the Netherlands and Austria, whose economies are intertwined with Germany’s, is based on long-term investments in high-quality manufacturing, he said.
“These are not low-wage countries,” Mr. Monks said. “They have privileged public servants, strong employment protection laws, strong collective agreements.”
“These are not short-term, shareholder, value-driven, flexibilized economies,” he added. “Their prosperity is driven by long-term investment in technology and innovation.”
Moreover, the German government subsidized companies to keep employees on the payroll working shorter hours when order books were empty, enabling them to retain a skilled work force for the recovery.”
From an Indian point of view, the German experience is an extremely valuable lesson because our investment in infrastructure and industrial innovation is laughable and we seem to suffer from an acute invincibility complex about our services sector. Together, they make for an ominous combination and act as perfect ingredients for a brittle economy with a “soft” foundation and a glass ceiling.
If we do not draw up comprehensive realistic time-bound plans to upgrade our manufacturing skills, and to create hard valuable intellectual property in the core industries, we will find it impossible to catch up, forget keeping up, with our “friendly” eastern neighbour’s frenetic pace who now has the confidence to match the developed nations “plant for plant, road for road, dam for dam, bullet train for bullet train, submarine for submarine and fighter jet for fighter jet”.
I will continue with this line of thought in a few more posts.